Contents:
January/February 2010
Contents:
The recent case of Goodridge v Macquarie Bank Limited [2010] FCA 67 includes a lengthy discussion of novation and assignment.
Mr Goodridge had entered into a margin loan agreement and related security agreement with Macquarie. The loan and security were transferred by Macquarie to a trust, the trustee of which was replaced by Leveraged Equities Limited as part of a sale of a portfolio of margin loans. Leveraged Equities then purported to make a margin call on Goodridge. Leveraged Equities sold some of Goodridge's securities over which he had granted a securing interest in partial satisfaction of the margin call.
Justice Rares reviewed the contractual provisions regarding making margin calls and rights to sell Goodridge's securities and held that the contractual requirements had not been satisfied. Accordingly, the margin call was not properly made and no right to sell Goodridge's securities had accrued.
Although not necessary, Rares J went on to consider whether Goodridge's loan and security had been validly transferred to Leveraged Equities.
Justice Rares held that there was no novation of Goodridge's loan and security as Goodridge had not agreed to the novation. He considered that a provision in the loan agreement that Macquarie "may assign, transfer, novate… any of its rights… and obligations under this Agreement to any person, without the consent of the Borrower…" did not affect this outcome. Justice Rares noted that Goodridge had no knowledge of the purported transferor. As Leveraged Equities was acting as trustee, its liability was restricted under the trust deed, while Macquarie's liability to Goodridge under the margin loan and securities arrangements was not subject to any such liability. Justice Rares considered that, in these circumstances, the apparent consent provision in the document could not constitute consent to a non-existent future transaction on uncertain and unidentified terms. Neither did the language in that clause grant Macquarie authority to consent to the novation on Goodridge's behalf.
Justice Rares also found that there was no valid assignment of Macquarie's rights to Leveraged Equities because Macquarie's rights and obligations under the margin loan agreement and related security agreement were so interconnected that they could not be separated in the manner Macquarie and Leveraged Equities asserted. Justice Rares found that, if the assignment had occurred as Macquarie and Leveraged Equities argued, this would have achieved an 'unworkable situation' where both Macquarie and Leveraged Equities would need to exercise certain rights under the contract where the terms of the contract only expressed those rights to be exercisable by one party.
Re Canterbury Building Society (2009) 10 NZCPR 370 involved an application by Canterbury Building Society to the High Court for an order under section 200(3)(d) of the Property Law Act 2007 for consent to purchase land, over which it was exercising its power of sale as mortgagee.
The Building Society held a mortgage over three properties. Despite extensive marketing by the Building Society, only two of the properties were sold, and both at well below market value. The Building Society then applied under section 200(3)(d) of the Act for permission to purchase the third property otherwise than by sale through the Registrar. The proposed purchase price for the third property was also considerably less than the valuation obtained by the Building Society. There was no opposition to the application by the mortgagor, guarantor or subsequent mortgagee.
Although the Act does not set out any specific criteria that the Court must consider when determining a section 200(3)(d) application, French J considered the application in the context of the mortgagee's obligations when conducting a mortgagee sale; namely the duties to exercise the power of sale in good faith and to sell the property for the best price reasonably obtainable.
Justice French considered that, in the circumstances, the proposed purchase price was the best price reasonably obtainable. Accordingly, the Building Society's application was granted.
On 16 February 2010, the Financial Services Providers (Pre-Implementation Adjustments) Bill passed its first reading and was referred to the Commerce Select Committee. The Bill will make technical amendments to the Financial Service Providers (Registration and Dispute Resolution) Act 2008 and the Financial Advisers Act 2008, with particular focus on the qualifying financial entity regime. A summary of the key amendments proposed by the Bill can be found in the November/December 2009 edition of Banking Law Update: http://www.russellmcveagh.com/_docs/BLUNovDec2009_273.html.
Submissions on the Bill close on 25 March 2010.
In December 2009, the Capital Market Development Taskforce released their report entitled "Capital Markets Matter". The Taskforce made 60 recommendations to be implemented over the next three years. If implemented, the Taskforce consider that investor outcomes will be improved (particularly due to better information and more choice of products) and rates of business formation and growth will increase.
In February 2010, the Government released its action plan in response to the Taskforce's report. The Government has not adopted all of the recommendations. However, the key recommendations that the Government is committed to implementing include:
- introducing plain English into investment statements and prospectuses, with warnings on risky or complex products;
- establishing a more co-ordinated approach to the Government's role in improving the financial literacy of New Zealanders;
- ensuring the duties of fund managers and supervisors are clear and enforced;
- considering consolidating parts of the Companies Office, Securities Commission, and the NZX Disciplinary Tribunal into a new market conduct regulator;
- making it easier and cheaper for companies to raise capital privately by clarifying and broadening the exemptions to the Securities Act 1978 and Takeovers Act 1993; and
- improving risk management in the economy by supporting the development of derivatives markets in commodities and energy,
many of which are proposed to be implemented in the course of 2011.
Two documents were released during February 2010 relating to new regulation of non-bank deposit takers or NBDTs. They were:
- NBDT Consultation Document: Liquidity Policy, released by the Reserve Bank; and
- Credit Ratings for NBDTs - Disclosure Guidance, released by the Securities Commission.
The liquidity policy consultation document outlines policy options being considered in relation to the liquidity requirements for non-bank deposit takers under the Reserve Bank of New Zealand Act 1989.
Under section 157Z of the Reserve Bank Act regulations may be made to require that liquidity requirements are included in trust deed for non-bank deposit takers. The regulations may prescribe liquidity requirements including specifying types of qualifying liquid assets, minimum amounts of liquid assets to liabilities and matching maturity of assets and liabilities.
The options considered by the Reserve Bank include:
- maintaining the status quo (that is, trust deeds must set out liquidity requirements, but there is no restriction on what those requirements must be);
- prescribing a measurement framework and requiring quantitative liquidity requirements to be included in trust deeds; or
- prescribing precise requirements.
The credit ratings guidance note is an interim guidance note, setting out the Securities Commission's intended approach to disclosure of credit ratings by NBDTs in the context of existing securities law.
From 1 March 2010 most NBDTs are required to have a credit rating from an approved rating agency. The (non-mandatory) guidance applies from 1 March 2010 until regulations for disclosure of credit ratings take effect. The guidance encourages NBDTs to display credit ratings in advertisements, prospectuses (the Securities Commission's view is that credit ratings are "material information") and investment statements and to ensure prominent information is published to explain the meaning and context of the credit rating to investors.
The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 was passed on 16 October 2009. In February 2010 the Regulation and Codes of Practice Discussion Document was released by the Ministry of Justice to invite discussion and comments on preliminary policy for the regulatory regime that sits under the AML/CFT Act.
The document outlines the policy criteria for the regulatory regime. It addresses and provides options for:
- the scope of the regulatory regime and how it should be implemented;
- time frames for implementation;
- exemptions;
- thresholds for transactions to be included under the regime;
- customer due diligence;
- third party relationships; and
- institutional arrangements.
Public comment is sought in relation to the application and scope of the proposed regime, preferred approaches and the effect the proposed regime will have on the industry. Comments should be provided by 19 March 2010.
The MAC clause: protection from the storm?
Markets disruption clauses in syndicated loans
The European response to the financial crisis
The September issue of the Butterworths Journal of International Banking and Financial Law contains three articles of interest.
- The first article is entitled The MAC clause: protection from the storm? by Arnondo Chakrabarti and Laura Brierly. The authors briefly discuss the elements of a typical material adverse change or MAC clause, counterparties' contrasting negotiating positions, interpretation of MAC clauses by the courts and the risks of incorrectly claiming that a material adverse change has occurred.
- The second article is entitled Market disruption clauses in syndicated loans by Philip Rawlings. Rawlings describes how a market disruption clause operates and discusses the practical reasons why these clauses are rarely called upon. He also discusses the issues that arise if a market disruption is called. For example, what the basis for determining the lenders' actual cost of funds should be, when that determination may be unenforceable as being unreasonable and managing confidentiality and competition issues within the syndicate. The article concludes with a summary of possible amendments to the market disruption clause, including changing the method of calculating LIBOR or changes to the criteria for calling a market disruption.
- The third article is entitled European responses to the financial crisis by Didier Martin, Oliver Saba and Forrest G Alogna. This article provides a high level overview of government responses in key European jurisdictions to the global financial crisis, including comparisons to the approaches in the US. The government responses discussed in the article include protecting liquidity in the financial markets (for example, by providing financial guarantee programmes and recapitalising banks) and reviewing the regulatory regimes applicable to financial institutions (for example, restricting executive compensation).
The October/November 2009 issue of the Australian Banking and Finance Law Bulletin contains an article entitled Personal Property Securities Bill 2009 - Chaos in the making! by David C Turner. The article gives a brief outline of the history of the Personal Property Securities Bill 2009 to date and comments on the absence of published policy justification for a number of material departures from Canadian and New Zealand personal property securities laws. The author is also critical of the short implementation period currently proposed and the apparent reliance on the three year review provision set out in the Bill, rather than attempting to remedy known issues now.
The September 2009 issue of the New Zealand Business Law Quarterly contains two articles of interest.
- The first article is entitled What is an "account receivable?" by Mike Gedye. The article considers the definition of an "account receivable" and its relevance under the Personal Property Securities Act 1999.
Gedye notes the importance of the definition of "account receivable" both under the Personal Property Securities Act (transfers of an account receivable are often deemed security interests and accounts receivable are probably the most common form of proceeds of collateral) and under the Companies Act (preferential creditors are paid from the proceeds of accounts receivable and inventory). He then discusses the decision in The Commissioner of Inland Revenue v Northshore Taverns Ltd (27/8/08 HC Auckland CIV-2006-404-6804). In that decision, Associate Judge Hole determined that "account receivable" was equivalent to "book debt" (a phrase commonly used prior to the enactment of the PPSA but having a narrow definition). Gedye examines the decision and argues that this interpretation is too narrow. - The second article is entitled The PPSA: the continued relevance of conventional legal principles in determining the existence of a security interest by Struan Scott. The author reminds us that, although title is not generally relevant under the Personal Property Securities Act, the PPSA does not exclude conventional legal rules of ownership in all circumstances. In particular, a security interest cannot attach to the property for the purposes of the PPSA until the debtor has rights in that property. General contract principles or the Sales of Goods Act may apply to prevent the debtor obtaining rights in the property, effectively excluding the application of the PPSA in those circumstances.
The September issue of the Journal of Banking and Finance Law and Practice includes an article entitled Australian taxation implications of the ISDA 2002 Master Agreement. The author gives a general overview of Australian withholding tax obligations in relation to transactions entered into under the 2002 Master Agreement. He then discusses the specific tax clauses in the 2002 Master Agreement. That is, the gross-up for "Indemnifiable Taxes"; typical tax representations given in a 2002 Master Agreement; and the tax-related "Termination Events".
The Report of the Parliamentary Inquiry into Banking, a multi-party initiative by Labour, the Green Party and the Progressives, was released in November 2009. The inquiry was tasked with reviewing why short-term interest rates offered by banks had not fallen in line with reductions in the Official Cash Rate. The inquiry found that the factors behind this include domestic and offshore funding costs, bad debt provisions and margins. That is, the Official Cash Rate is not a reliable indicator of bank interest costs.
The Inquiry indentified other issues facing the banking sector, including that the present monetary policy framework could have serious unintended consequences for New Zealand's economic recovery, and that there was a serious misallocation of resources in the economy, with demand factors accentuating monetary imbalances.
The Inquiry proposed that on each of these issues further policy work should be done to explore reforms which will promote a more efficient and equitable economy. In addition to this, the Inquiry proposed the Reserve Bank collect more information relating to the cost of overseas borrowing by the banking system and make such information public on its website.
In September 2009, the Australia-New Zealand Shadow Financial Regulatory Committee released a statement entitled Is a credible exit from government debt and deposit guarantee programmes possible? In their statement, the Committee briefly records the history of the Crown guarantee schemes in New Zealand and Australia. The Committee then discusses the basis and desirability of Crown guarantees for wholesale funding and for retail depositors. In general, the Committee is opposed to Crown guarantees as they distort the pricing of risk and competition between financial institutions. However, in some circumstances, short-term liquidity or depositor confidence issues require guarantees to be provided. In such circumstances, the Committee advocates tailoring guarantee schemes to address the distortions referred to above and, where credible to do so, withdrawing the guarantee scheme as soon as possible.
On 18 November 2009 the Treasury announced changes to the retail deposit guarantee scheme going forward. The principal changes to the scheme were:
- Allowing Institutions to provide guaranteed and non-guaranteed debt securities. This offers more flexibility to the institution and the investor. Institutions must make it clear to investors whether the investment is guaranteed or not.
- Providing a 14 day "stand down" period between a potential default and invoking the Crown guarantee to give institutions a chance to resolve temporary issues and avoid receivership.
- Allowing the Crown to set a maximum timeframe for claims to be made after default. This is designed to improve the operation of the scheme by facilitating prompt payments to creditors by the receivers of any firm that has defaulted.
The Government has announced that the wholesale funding guarantee scheme will end on 30 April 2010. The wholesale guarantees assisted New Zealand banks to raise funds when the wholesale markets were illiquid. Now that market conditions have improved and New Zealand banks are able to raise non-Crown guaranteed funds in those markets, the wholesale scheme is no longer required.
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